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Lawmakers are split on how to respond to the recent bank failures

Sen. Tim Kaine, a Democrat from Virginia, speaks during a news conference following the weekly Democratic caucus luncheon at the Capitol on Wednesday. Kaine said the vice chair of the Federal Reserve is leading an analysis of what happened with SVB and Signature Bank, which he expected to be finished by May 1.
Bloomberg via Getty Images
Sen. Tim Kaine, a Democrat from Virginia, speaks during a news conference following the weekly Democratic caucus luncheon at the Capitol on Wednesday. Kaine said the vice chair of the Federal Reserve is leading an analysis of what happened with SVB and Signature Bank, which he expected to be finished by May 1.

Days after the failure of two regional banks shook the financial industry, senators on Capitol Hill say they want answers but disagree on what action to take and how quickly to act.

Many Americans are worried about potential ripple effects from the collapse of Silicon Valley Bank in California and New York's Signature Bank on the banking industry, technology and their own wallets.

Biden administration officials are now urging calm and looking to figure out what went wrong.

Facing criticism, Federal Reserve Chair Jerome Powell said this week that the body's vice chair will conduct a review of its supervision and regulation of Silicon Valley Bank, to be released by May 1.

In the meantime, some lawmakers are offering their own explanations for what happened — though they vary.

Some Democrats blame a bipartisan rollback of the landmark banking regulations from the Dodd-Frank Act during the Trump administration, while others say it's not clear that those would have made a difference. And lawmakers have conflicting ideas about what Congress should do now.

Republican Sen. Mike Rounds of South Dakota, a member of the Senate Banking Committee, told Morning Edition's Steve Inskeep on Thursday that it's not yet clear when Silicon Valley Bank underwent its last stress test — an assessment of health the Fed runs annually for the biggest banks and periodically for somewhat smaller banks like Silicon Valley.

Although the bank's assets quadrupled to just above $51 billion at the start of 2018 to just under $212 billion last year, Rounds says regulators probably didn't think giving the company a stress test was a priority.

"They may very well have been in a position where the regulators either said, 'We'll catch it at a different date' or 'We're not worried about it yet,'" Rounds adds. "The real question for us is: Does the Fed think that the regulatory environment that they have established for the bank — was it accurate, was it the right one?"

A refresher on the Silicon Valley Bank collapse

Silicon Valley Bank — the nation's 16th largest bank and a favorite of powerful tech investors — collapsed on Friday, becoming the largest U.S. bank to fail in over a decade.

New York's Signature Bank followed suit days later, and both banks are now under the control of federal regulators.

The Biden administration has sought to assure Americans that the banking system is safe, though the chaos has reverberated across the financial industry.

Some panicked customers are moving their money from regional banks to larger lenders, which could reshape the banking landscape long-term.

Stocks tumbled on Wednesday amid fears that the turmoil would go global, as European bank Credit Suissegrappled with its own financial woes (its shares jumped Thursday after it announced it would borrow billions from Switzerland's central bank).

And the Federal Reserve, which was already set to meet next week to decide on another possible interest rate hike, is now facing scrutiny for what critics call a lack of oversight of the bank.

Critics say the Fed — which was the primary federal supervisor of the bank — missed clear red flags about its financial state. Some are also blaming a 2018 law, signed by then-President Donald Trump, that rolled back regulations on banks of Silicon Valley Bank's size.

Congress loosened restrictions a decade after the 2008 crisis

Lawmakers took action after the country's 2008 crisis by passing the Dodd-Frank Act in 2010, which put new rules in place for banks and lending practices.

Among them, it increased supervision for large banking institutions, which it defined as those with more than $50 billion in assets.

Banks lobbied against the regulations, pushing to shift that threshold to $250 billion. It also faced heavy criticism from Republicans, including Trump — who vowed in 2016 that he would dismantle it and took steps in that direction during his time in the White House.

In 2018, Congress voted to scale back some regulations on smaller and mid-size banks.

Lawmakers from both parties argued that the stringent rules put in place by Dodd-Frank Act were forcing local and community banks out of business.

Still, those rollbacks were not without their critics.

Democratic Sen. Elizabeth Warren warned at the time that easing restrictions could put the banking industry on a slippery slope.

She drew an even more direct line on Wednesday, when she spoke out against "a crisis that was created when Donald Trump and the Republicans, with some help from Democrats, rolled back basic banking protections."

Warren, along with dozens of Democrats including Rep. Katie Porter, D-Calif., and Sen. Bernie Sanders, I-Vt., introduced legislation this week to repeal the 2018 law.

"If we hadn't allowed the regulators the discretion to weaken bank regulations, then the regulations would not have been weakened," Warren said. "We need strong stress tests in place. It was a mistake to take them away. We got to put them back."

Lawmakers disagree on how to proceed

But other lawmakers cautioned against swift action.

Sen. Tim Kaine, D-Va., who voted for the 2018 Dodd-Frank revision, would rather wait for the results of the Fed's investigation into what happened with Silicon Valley Bank.

"So I think we ought to look at that and then decide what are the appropriate things that either Congress or the administration should do," he said.

Kaine said addressing the situation would require "putting the Fed under the microscope, too."

"Did they have regulatory power that they didn't use? That's got to be a question," he said Wednesday.

Sen. Kevin Cramer, a Republican on the banking committee, said "we need to learn a lot more before we apply some broad, sweeping reforms," adding that House and Senate committees would likely hold hearings on the matter, in addition to investigations by the DOJ and a review by the Fed.

Moving too fast or too broadly, he said, could stoke panic rather than ease it.

"The tendency to rush could be counterproductive," he said. "At the same time ... somehow we have to create calm where calm doesn't exist, particularly if it's unwarranted alarm."

Rounds also is in favor of getting "all the facts put together first," stressing on Thursday that it's only been a week since the collapse and the Fed is just beginning its probe.

Still, he is open to revisiting the 2018 legislation, noting that "there is no such thing as a perfect law." The same is also true for the Fed, he adds.

Copyright 2023 NPR. To see more, visit https://www.npr.org.

Rachel Treisman (she/her) is a writer and editor for the Morning Edition live blog, which she helped launch in early 2021.
Lexie Schapitl is a news assistant with NPR's Washington Desk, where she produces radio pieces and digital content. She also reports from the field and assists with production of the NPR Politics Podcast.